In a perfect Wall Street world, every trade would be a winner right from day one right up until the day you sell.
Any real-world trader knows trades and investments don’t always go according to plan, especially in the short-term.
It can be extremely difficult to see red in your trading account day after day and stick to your guns on a trade. Here are 10 tips on how to maintain conviction in your trading and investment ideas.
Have a clear thesis. Before you buy a stock, you need to have a clear fundamental and/or technical reason for buying. If you don’t have a clearly defined reason to buy a stock in the first place, you don’t have a good reason to hold onto it when the trade goes against you.
Remember why you bought. Sometimes, a thesis doesn’t play out the way you thought it would. When a trade goes south, consider whether your original thesis still holds up. If it does, it can serve as a reminder to stick to your guns.
Have a defined trading strategy. Identifying a stock you want to buy is just step one in the process. Before you take a position, know what you will do if the stock goes up, what you will do if it goes down and what you will do if it goes sideways. There are plenty of different strategies that work, but having a clear strategy provides comfort on red days.
Keep emotions out of it. Listening to your emotions probably never got you a better grade on a math test in school and it won’t get you back in the black on a down day for your portfolio. The best traders know to always keep a clear head and make calculated, rational decisions.
Have an exit strategy. Whether it be a target price, a trailing stop-loss, a technical signal or any other indicator, it’s always a good idea to know when to cash in or throw in the towel on a trade. Having an exit strategy and sticking to it can prevent you from panic-selling a good trade or taking a bigger loss on a loser than you anticipated.
Have an appropriate position size. If you’ve bet more on a stock that you are comfortable losing, the fear of loss may be too much to overcome, and it may pressure you to abandon a good idea before it plays out fully.
Stay informed. Depending on your strategy, watch the charts, monitor the headlines and make sure you are tracking what’s going on with your stock. Knowing you are well-informed on everything that’s going on with a stock can help you maintain your conviction in a particular thesis.
Be patient. The best traders often beat the rest of the market to the punch, which means it could take more time than anticipated for a trade to play out. The Nasdaq hit 3,000 in November 1999, about 14 years before it should have. Yet anyone who shorted the index at that point in the infamous dot-com bubble had to wait another year before that trade turned a profit.
Learn from your mistakes. When a trade doesn’t work out, do a post-mortem to understand what didn’t work and why. The more you understand the mistakes of the past, the more conviction you will have in your future trades.
Don’t let others get in your head. While it’s always smart to consider outside advice, don’t let someone else talk you out of a trade you believe in just because you’re in the red. The investing world and social media are full of people who have 20-20 hindsight when it comes to investing. If you listen to them too much, it can make you feel like every single trade should be a winner and every day should bring a profit.
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